Since the official end of the last recession in June 2009, the wealthiest 1% households in the U.S. have captured 91% of all the net income gains, according to university studies based on US income tax records. At the same time, median family real incomes have consistently fallen 1%-2% every year since 2009 in the US—and that’s at the median income level. For those below the median, the real income decline has been even greater. That’s almost 100 million households of ‘production and non-supervisory workers’ in the US, trying to survive on stagnant or falling wage incomes for the past six years.
How has this extreme inequality come about? How is it that wage incomes have been stagnant during a so-called ‘economic recovery’ since 2009, while the wealthiest 1% have captured virtually all the income gains for themselves?
It starts with profits. Compressing wages have allowed corporations to enjoy historic record profit margins—i.e. profits not from increased sales of goods and services but from slimming down operations, from cost cutting, which means mostly labor cost cutting.
Grow Profits by $5 Trillion in 5 years
Official government estimates of US corporate profits amounted to $1.3 trillion in 2008, rising to more than $2.4 trillion in 2014. Cumulatively, over the six years since 2009, that adds up to extra profits of $3.7 trillion over and above the $1.3 trillion level of 2008. But that’s not all. That’s only profits from sales of goods and services.
Not included in the $3.7 trillion are profits from corporations’ speculating in financial assets and securities, which is equal to another fourth of total corporate profits. That’s profits from buying and selling stocks, bonds, derivatives, currencies, real estate properties, and so on. At roughly one fourth, that’s about another $1 trillion dollars .
So US corporations have added about $5 trillion extra profits since 2009, give or take a couple hundred billion dollars here or there. The key question is what’s happened to that $5 trillion?
$3.8 Trillion in Stock Buybacks and Dividends
The lion’s share of the $5 trillion--$3.8 trillion— went to wealthy corporate shareholders, distributed in the form of record corporate stock buybacks and dividend payouts since 2008. As corporations reaped historic, record profits—from squeezing wages and speculating in financial securities—so too did their wealthy ‘owners’ receive record distributions of corporate income in the form of stock buybacks and dividend payouts.
That’s how the rich get richer in the USA. Their corporations are the ‘conduit’; stock buybacks and dividend payouts are the ‘pay offs’. Here’s some interesting facts on corporate stock buybacks and dividend payouts in recent years. Note the figures apply only to the largest 500 US corporations. Totals would be higher if all corporate buybacks and dividends were included:
In 2009, Standard & Poor’s largest 500 corporations distributed stock buybacks of ‘only’ $137 billion to shareholders. Dividend payouts were another $195 billion. That’s a combined $332 billion paid to shareholders in 2008, in what is generally considered the worst year of the recent 2007-09 great recession. Oh, such hard times for shareholders, only $332 billion—while 27 million workers lost their jobs, had their real incomes reduced for the next five year, and 14 million lost their homes.
But the years since 2008 have been even better for shareholders and the wealthiest 1%, in fact much better: escalating ever higher since 2009, by 2014 corporate buybacks rose to $553 billion and dividend payouts by another $350 billion. That’s $903 billion in just the year 2014 alone, or three times the level of combined buybacks and dividends in 2008. And over the five years since 2009, that’s a cumulative total of $3.8 trillion in buybacks and dividends.
That $3.8 trillion combined payout last year leaves just $1.2 trillion of the $5 trillion undistributed—which coincidentally is just about what remains on corporate balance sheets for the largest 500 corporations in hoarded cash at year end 2014.
Forecasts for this year, 2015, project a further 16% rise in corporate stock buybacks and another 14% for dividends. That’s more than $1 trillion that will be paid out in 2015—$604 billion in buybacks and $400 billion in dividends.
Meanwhile, economists try to convince us the gross income inequality in the USA today is the result of lack of workers pursuing better education or simply not being productive any more. The victims of income inequality are the cause, in this perverted logic of the professors. At least their conservative ilk. The more liberal variety of the professorial tribe claim it is excess compensation paid to CEOs or the tax system that has produced the income inequality. Neither liberals or conservatives say anything about inequality resulting from profits from excess financial speculation, and from six years of wage compression, subsequently distributed in the form of annual trillions in stock buybacks and dividends.
Capitalism’s New 21st Century ‘Business Model’
Global capitalism is shifting to a new, even more profitable business model. In decline is the old industrial production model. Fast replacing it is a model focusing on financial asset investing and speculation, on artificially boosting financial asset values like stocks, bonds, derivatives, real estate and the like.
In the post-2000 global world, instead of investing in real things, i.e. real assets, buildings, equipment, etc., in order to produce real goods and services, the new corporate model is squeeze profits from wages and then add to that further profits from speculating in financial securities. Profits from cost cutting or profits from driving up financial asset prices resold for a capital gain, or some combination of both. That’s the new model. Forget making things that require investment and the creation of decent paying jobs and incomes to buy the things.
Create profits by driving up financial asset prices. Buyback stock and payout dividends. That drives up stock prices even further. (In the US the stock markets have tripled in value since 2009). Both stockholders and corporations then get even richer. Complete the new model by arranging for government and ‘bought and paid for’ politicians to reduce taxes on dividends and capital gains from stock sales to 15%, as in the US. That way shareholders can keep the lion’s share of the capital gains from the buybacks and dividends.
General Electric Co., Buybacks, & Blackstone
General Electric Company is one of the largest manufacturing companies in the US and the world. It produces aircraft equipment, transport equipment, medical devices, power and water systems, lighting and appliances, and oil & gas equipment. It also became one of the biggest finance companies in the US in recent decades, earning from its financial subsidiary, GE Capital Assets, $6 billion of its annual $30 billion revenues last year.
But GE represents the classic ‘old business model’ of industrial production, of goods provided to both businesses and consumers. Last week GE announced its plan to buyback $90 billion of its stock over the next three years, starting with $50 billion this year. GE’s stock price has languished since 2007. It promised a mere $10 billion stock buyback in 2012, but that did little to raise its stock price two years ago. However, the $90 billion announcement last week produced an immediate double digit overnight stock gain for the company. GE has thus signaled it is planning to try to join the ranks of the new 21st century business model, where the way to raise stock prices is to buyback stock rather than produce profit gains from making and selling more real things.
To finance the $90 billion in buybacks, GE announced it was selling off much of its GE Capital Assets financial operation. $26 billion of its portfolio of offices, malls, commercial properties, and housing is being sold. The sale is necessary to offset growing losses from GE’s oil and gas equipment business, which is now collapsing in value as the global oil glut continues. Longer term prospects for GE’s old industrial products business model don’t appear very good. But $90 billion in buybacks will go a long way to support GE stock for a while.
In the 21st century it is now more important to boost corporate stock prices by whatever means, more important than making profits the old way, investing in real assets, providing jobs and incomes, and making products to sell to customers.
To fund its $90 billion stock buybacks GE is selling off assets to a company that represents the ‘new business model’ of the 21st century global capitalism. The global private equity company, Blackstone, is buying most of GE’s financial real estate assets currently up for sale. Blackstone doesn’t make things, or employ many workers, or generate income for many except its managers and investors. It fact, it makes nothing at all. It has pure financial speculation business model, as are all private equity companies. Blackstone buys assets and resells them at a higher price, making speculative financial profits. Half of its total profits in 2014 were made from buying real estate and then ‘flipping’ it, i.e. selling at a higher price. Blackstone owns $300 billion in assets it has bought from other companies, $81 billion of which is real estate. It is now the largest ‘landlord’ in the USA with more than 50,000 housing properties which it rents out. It has become far more profitable than General Electric, by speculating in assets rather than producing anything. It represents the far more profitable business model of 21st century global capitalism than does GE. It represents the new face of 21st century capital.
The General Electric vs. Blackstone comparison reflects several key trends underway in 21st century global capitalism: why the global economy today is on a steady, long run slowdown, why real investment is on a slowing trajectory, and why a drift toward deflation in goods and services in settling in everywhere. The old industrial capital business model represented by GE is under significant pressure. Revenues are slowing. Stock prices are consequently performing poorly. GE and others are thus driven to sell off parts of the company in order to fund buybacks in order to keep their stock prices from declining further. In contrast, financial asset speculators like Blackstone are buying up the assets of the old industrial model companies, and generating more and more profits from pure financial asset investing.
Investors are therefore piling in to the Blackstones, knocking on the door, wanting to give it the money capital they are diverting from the GEs. Their motto: ‘Who cares how profits are made, so long as they can be made faster and greater than before. So give us more stock price increases, more buybacks and more dividends. Who cares about stock or bond bubbles. We can get out before the bust comes again’—or so they say, time and again, until the next financial crash in stock and bond values.
~ Jack Rasmus serves as Federal Reserve Chair at the Green Shadow Cabinet
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